Vocation shares slump after returning to trade

Vocation is very reliant on government contracts and education outsourcing.

ABC News

Shares in the education and training services business Vocation Limited slumped more than 70 per cent on its return to the market after a five-week voluntary suspension, although they have since recovered much of that lost ground.

The company has flagged potential writedowns of its troubled Victorian business worth between $235 and $245 million, as well as the weakening of revenue from its businesses in the June half-year.

Vocation has also announced a restructuring of its $85 million loan facility, and its banks have demanded the company pay down a material amount of debt by May 2015.

The company said it will now engage in a competitive sale process to auction parts of its business. Vocation has received over 30 expressions of interest and expects to complete the sale process by April 2015.

Vocation shares closed at 24.7 cents when they entered a voluntary suspension on January 16.

On returning to trade this morning, they dropped to just 7 cents, a fall of 72 per cent.

By midday (AEDT), they had recovered to 16.5 cents, still 34 per cent below Vocation's January closing price.

From high-flyer to also-ran in a flash

In many ways, Vocation was a product of its time - and government policies that saw a $9 billion industry grow from nothing in the space of a few years.

Vocation was formed when three separate education and training businesses were brought together under the one umbrella - Customer Service Institute of Australia, Avana Learning, and the BAWM Group.

Within a year of listing on the Australian Securities Exchange in December 2013, Vocation's market value had soared to $782 million.

But in October 2014 serious questions about the company's profitability emerged, sending its share price plummeting, and causing class action lawyers and corporate recovery experts to pounce.

"We were concerned that revenue was unsustainable, that the government was going to turn around and say we're transferring too much money to the private sector, and the private sector was cherry picking which courses they wanted to offer," said Steve Johnson, chief investment officer of Forager Funds.

Mr Johnson said he was concerned about the vocational training sector as a whole, which had sprung from nothing to a multi-billion-dollar industry in the space of a few years, largely on the back of government subsidies.

"They were competing against the TAFEs, they were only offering the courses where they thought they could make a lot of money, and there was lots of talk going around of them encouraging students to do courses that weren't right for the student and passing people that they probably shouldn't have been passing," he added.

In February 2013, then-CLSA analyst Paul Graham said in a note to clients that Vocation's share market listing "carried some traditional red flags ... It is formed by three businesses merging at IPO (initial public offering); has a high-growth forecast for the first financial year; and the majority of the IPO proceeds were taken out by the vendors."

That was a point also noted by longtime stock picker Roger Montgomery.

"After the float, about $250 million was raised and $225 million was going to the vendors," Mr Montgomery, chief investment officer of Montgomery Investment Management, told the ABC.

Another analyst, Taylor Collison's Michael Croser, wrote in March 2013 that Vocation's business model was "unsustainable", given its heavy reliance on government contracts and its rapid expansion.

By April 2014, Vocation was the target of short sellers - investors who enter contracts to sell a stock first and buy it back later, making a profit if the share price falls.

In October 2014, when Vocation confirmed its BAWM subsidiary had lost a $20 million funding agreement with the Victorian government, its share price plunge was rapid and near-terminal - falling from $2.30 to a low of 13.5 cents in December.

Battle to survive

Two weeks ago the Victorian Government announced a review into the state's vocational education and training funding model.

Given the issues highlighted during Vocation Limited's fall from market favour, it may only be a matter of time before other states follow suit.

Vocation's troubles do not end there. The law firms Slater & Gordon and Maurice Blackburn are both investigating class actions against the company, arising from the representations it made to the market in 2014 over its Victorian Government contracts.

Vocation said that, once the sale process is completed, it will have "a viable ongoing business after this".

That may be so - but whatever is left of the company, it will be a mere shadow of the business that once soared to great heights on the Australian market.